Developing economies face a decade of stagnation. Their plight poses dangers for the U.S. and the world. During the global financial crisis a decade ago, emerging markets supplied a supportive engine of growth. This time they might throw recovery into reverse.
For months, Covid-19 spread slowly in the developing world. Now about 70% of new cases plague poorer countries, and that’s surely an undercount. Developing countries struggle with weak public-health systems and have a hard time implementing social distancing and quarantines. Many people lack basic needs such as soap and water.
The economics of the pandemic smashed emerging markets. Remittances fell. Tourists vanished. Exports, including of energy and commodities, tumbled. Governments have less money to help people. Deficits and debts jumped. Long-term foreign investments dropped.
Developing countries looked for international financial lifelines. Emerging-market assets fell sharply, but then some rebounded because the flood of central-bank liquidity led investors to chase higher yields, especially for dollar-denominated debt and equities. Yet as developing market currencies depreciate, investors have grown fearful.
The most vulnerable—Argentina, Ecuador, Lebanon—have already faltered. Turkey and South Africa are stumbling toward the edge. The wise and wary recall that when events trigger breaks in emerging markets, plunges have been rapid and sharp.
A scan of the world reveals plenty of potential unnerving incidents that could transform pandemic trauma into financial and social breakdowns. The U.S. and China are locked in brinkmanship, whereas they cooperated during the financial crisis. The frictions of trade relations are sparking hostilities, as policy makers ignore the lessons of the 1930s. A financial crisis in a major emerging market could spur retreats in distant places, as defaults did in the late 1990s. A rush of corporate insolvencies could prompt investors to pull back and deleverage.
Economic and social shocks create huge political waves that overwhelm governments. This crisis is kicking out the ladders under families climbing up from poverty to attain incomes and hopes—now dashed. Schooling will suffer. Small and midsize enterprises and those without internet connections will lose out. The U.S. has paid a big price in the past for political upheavals in Latin America, including through migration, insurgencies, criminal networks and loss of partnerships. The European Union shares a geographic destiny with a struggling Africa and Middle East. South Asia seethes with simmering conflicts. Central Asia, dependent on remittances and commodities, could become a dead end for China’s Belt and Road and a dangerous borderland for Russia.
In weeks, the World Bank and International Monetary Fund will convene virtual annual meetings. The leading economies of the Group of 20 need to wake up to these dangers. The U.S. should recognize that its healthy recovery—from both disease and economic disaster—depends on revivals elsewhere. America First shouldn’t morph into America Alone. Even modest moves toward cooperation can build confidence. Presidents George W. Bush and Barack Obama, as well as the U.S. Congress, recognized these interconnections in 2008-09. The 2009 G-20 summit in London established a stable floor on which countries began to rebuild.
Countries will give their own citizens first priority for vaccines and treatments. But they can also commit support for the most vulnerable in developing countries. The World Health Organization should play a role, but in any event GAVI (formerly the Global Alliance for Vaccines and Immunization), which the U.S. has long supported, could step in. There are models in President Bush’s initiatives to counter HIV/AIDS, malaria and tuberculosis.
The G-20 accepted an IMF stopgap recommendation to let the poorest nations defer payment on debt owed to governments. Other countries will need help as well. Private lenders who chased higher returns in riskier markets will need to restructure debts. Some investors will claim that revised terms will hurt borrowers’ access, but extraordinary events—whether for homeowners or countries—warrant special arrangements.
China’s loans will need to be part of these debt revisions. The U.S. and others are more likely to gain China’s cooperation if they direct the IMF to coordinate a multilateral effort designed to help developing economies, not score points.
The dangerous circumstances might even prod the U.S. and China to rediscover a common interest in a healthy world economy. Supply and transport disruptions are stoking the risk of food price surges, as well as export bans that would exacerbate dangers for everyone. On the other hand, changing supply chains will create opportunities for new infrastructure investments. Removing trade barriers will make economic recoveries easier. The IMF and World Bank should stretch to supply concessional long-term lending, and their government shareholders should supply more resources if needed.
Developed economies have limited the tail risks that might have allowed this pandemic to spiral downward into a decade of depression. But the tail risks for emerging markets are growing. The U.S. and other G-20 economies cannot afford myopic visions of recovery.
Mr. Zoellick is a former World Bank president, U.S. trade representative and deputy secretary of state. He is the author of “America in the World: A History of American Diplomacy and Foreign Policy.”
The post Leave No Country Behind in the Post-Covid Recovery appeared first on WSJ.